An Historic Way to Reduce Uncertainty

FROM A LECTURE SERIES BY PROFESSOR CONNEL FULLENKAMP, PH.D.

Uncertainty is commonly defined by a lack of information. So the obvious way to deal with uncertainty in life? Find ways to obtain more information. Seems simple, right?

Image of person on tablet getting data

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Playing with Numbers

Every piece of information we produce reduces uncertainty, at least a little bit.

But you have to expend resources like time, effort, and money to gather information and process it into a usable form. Some types of information are cheap to produce, and other types are expensive.

How is information produced?

One of the main ways to create information is by measuring things. People measure anything and everything. In other words, people seem to naturally want to gather data. And we keep records of the things we measure.

Why? Well, so we can play with the numbers!

Humans love to compare numbers. Interesting facts and figures fascinate us. The media bombards us with factoids, and we eat them up. And we love to make pictures—charts and graphs—out of the data we gather. We can’t help it.

This natural fascination with data helps people deal with risk. When we compare data, we notice patterns. And these patterns help us make inferences about things we don’t know – and probably can’t ever know directly. We can make better guesses about what will happen in the future by using patterns in the data.

Ancient Patterns

Image of Egyptians gathering data
Ancient Egyptians practiced astronomy to predict the flooding of the Nile with accuracy

It’s surprising sometimes to think how advanced the science of astronomy was in many ancient civilizations. People weren’t only interested in the stars for the fun of it, but because they noticed the patterns in the stars helped to predict patterns in the seasons.

In Egypt, astronomy was used to predict when the Nile River would flood. In that civilization, this was the make-or-break economic event each year, similar to the arrival of the monsoon in India. Gathering accurate information about the movement of the stars and planets helped reduce uncertainty about when to plant the crops.

Big Payoffs

There can be big payoffs to reducing uncertainty through producing information.

When we have more information, we can make better choices, which in turn increase production and profits, reduce losses and waste, and generally make people a lot better off. It’s no wonder, then, we devote a huge amount of resources to producing information.

Image of data being projected from tablet
The government invests billions of dollars a year into collecting data.

The government itself invests billions of dollars a year into collecting data. Think about the Census Bureau, which keeps track of how many people live in the U.S.

The private sector also gathers vast amounts of data. Even before the advent of the Internet, gathering data was essential to running a modern business. Companies routinely perform test marketing, consult with focus groups, and conduct surveys before they commit to new products. Lots of companies thrive simply on the business of collecting and selling data.

Some companies don’t just deal in raw data—that is, lists of numbers and other information that they’ve collected. They also sell the information they create, using the data they collect as raw material.

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Everyday Uncertainty

Human beings are great at noticing patterns in data, and at figuring out how to use this information to reduce risks. You probably do this in your everyday lives.

For example, let’s say you live in a big Midwestern city, and you make sure to fill your pickup truck with gas early in the week, usually Monday or Tuesday. That’s because you’ve noticed that, in your city, gasoline prices often jump up by large amounts on Wednesdays and only gradually come back down over the weekend.

Gas prices don’t always behave this way, but this strategy can help you deal with the uncertainty caused by not knowing exactly when gas prices will rise – or by how much.

As you can see, it’s really not a very big intellectual leap to go from noticing patterns in data to creating models to help us make educated guesses about information that we’d like to know.

From the lecture series The Economics of Uncertainty
Taught by 
Professor Connel Fullenkamp, Ph.D.